چکیده انگلیسی

When a company recognizes a restructuring charge, current operating earnings are reduced by the accrued estimated costs of a typically multiyear restructuring plan. Given the magnitude and non-recurring nature of the charge, analysts and the popular press often attempt to remove the effects of the restructuring and focus on pre-charge earnings. Thus, the restructuring phenomenon raises concerns about the value-relevance of fundamental accounting data. This paper investigates this issue by assessing the value-relevance of both current and forward-looking accounting information for a sample of restructured firms. We use a residual income valuation model that is based on book value and projected abnormal earnings to uniquely capture the accounting dynamics of the restructuring event. The explanatory power of this valuation model is consistently higher than models based on current earnings even after controlling for the non-recurring charge. The results also indicate that the value-relevance of earnings declines following a restructuring, while the forward-looking information marginally increases in explanatory power. These results suggest that subsequent to a restructuring, investors price the dissipation of owners' equity reflected in current book value and augment that book value with more forward-looking accounting information consistent with the residual income model.

مقدمه انگلیسی

This paper investigates the value-relevance of current and forward-looking accounting information following a corporate restructuring, an event which may severely disrupt the earnings process and obscure its information content . In a typical corporate restructuring, the firm attempts to streamline operations by disposing of nonproductive assets and/or workforce reductions . The estimated costs of such multi-year restructuring plans are accrued and charged to current
income . Therefore, current year earnings contain a large "non-recurring" component while the uncertain benefits from the restructuring plan (e .g . enhanced operating income) will not be recognized until future periods . Analysts' concerns over the accounting treatment of the restructuring event are reflected in the following comment by Ciesielski (1995) in "The Analyst's Accounting Observer :" The obfuscation they [restructuring charges] produce in the determination of income is always the same : the charges in one period do not reflect the activities of only that period . Reported
future earnings tidily exclude any expenditures being made that may benefit those periods .Therefore, financial analysts and investors attempting to value a firm may perceive accounting earnings as less relevant following a restructuring due to severe matching problems.
Prior research suggests that large write-offs tend to diminish the value-relevance of current year earnings, even after removing the special charges against current income (Elliott & Hanna, 1996) . Other research suggests that the valuerelevance of book values increases in the presence of one-time charges (Collins et al ., 1997 ; Jennings et al., 1998) . While these studies address the value implications
of historical cost accounting data from the current financial reporting
model, the value-relevance of projected future earnings, conditioned by the uncertain impact of a restructuring, has not been examined .
The objective of this paper is to extend prior research by applying a formal valuation model that incorporates current book value as well as forward-looking accounting information to firms that have restructured operations. From an accounting perspective, the restructuring event can be characterized as the trade-off of current book value in anticipation of greater profits in the future .
To capture these dynamics, we apply a residual income model (Ohlson, 1995 ; Feltham & Ohlson, 1995) to a sample of restructured firms . Theoretically, the Feltham-Ohlson model appears to be ideally suited to a study of restructuring firms because it expresses firm value as a function of both the current book value of recorded net assets and the expected future abnormal earnings relative
to those net assets . However, it is not clear the extent to which investors price both the current restructuring write-off and the implications for expected abnormal earnings . Although the empirical validity of the residual income model has been studied for a broad cross-section of firms, the resiliency of the model has not been evaluated in the context of the significant operational changes and
the added uncertainty that accompany a restructuring .' In general, very little is known as to how investors interpret and process
fundamental accounting data surrounding a restructuring . We investigate this issue by relating observed market prices to the Feltham-Ohlson valuation model and then comparing the explanatory power of that model to the explanatory power of models that contain current earnings and/or book value. Our results indicate that the Feltham-Ohlson residual income model consistently outperforms
current period earnings, book value, or both, even after controlling for
the non-recurring restructuring charge . The results also indicate that the valuerelevance of earnings decreases subsequent to a restructuring, while the forward-looking information marginally increases in explanatory power . However, we also find that projections of future earnings do not totally subsume the information in current earnings .
Our results suggest that market prices impound the revised book value and expected abnormal earnings following a restructuring, generally consistent with the residual income concept . Thus, investors appear to augment current book value with more forward-looking information, supporting the broader recommendations in the AICPA Special Committee report entitled "Improving Business Reporting - A Customer Focus" (Jenkins Report, 1994) .
The remainder of this paper is organized as follows.The next two sections discuss the motivation for the study and review the Feltham-Ohlson valuation framework .This is followed by a description of the research design, sample selection criteria, and empirical results . The final section presents the conclusions of the study.

نتیجه گیری انگلیسی

When a company recognizes a restructuring charge, the financial statements report the accrual with continuing operations . However, the magnitude of the charge can have a substantial impact on the firm's reported earnings and book value . Given the non-recurring nature of the charge, analysts and the popular press appear to focus on pre-charge earnings . Despite the proliferation of corporate
restructurings, few studies have directly addressed the value relevance of fundamental accounting information in this context. While some empirical research suggests a decrease (increase) in the value-relevance of earnings (book value) following a corporate restructuring, this project also documents the valuerelevance of forward-looking accounting data following a restructuring . We employ a formal valuation model based on book value and projected abnormal
earnings and assess the explanatory power of this model with respect to price and changes in price . We then evaluate the relative and incremental explanatory power of current earnings information compared to the residual income model .
Whereas current earnings and book value combine to provide value-relevant information, investors apparently demand more forward-looking information . We find that the earnings forecast data embodied in the residual income valuation model provides a better representation of observed market prices both before and after the restructuring . In addition, the value-relevance of the
forward-looking data increases slightly following the restructuring, whereas the value-relevance of current earnings declines . Isolating the recurring component of earnings from the restructuring charge mitigates the diminished value relevance of earnings, but it still does not match the residual income model as a representation of market prices . Although the relative explanatory power of the residual income model is clearly superior, we find that current earnings
information is incrementally value-relevant after controlling for the forwardlooking accounting data. In conclusion, our results tend to support the recommendations of the Jenkins Committee (1994) that users need information beyond the current reporting model that helps them project future performance .